Form 10-K for GLOBAL CASH ACCESS HOLDINGS, INC.
15-Mar-2010
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes contained herein and the information included in our other filings with the Securities and Exchange Commission. This discussion includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements in this Annual Report on Form 10-K other than statements of historical fact are forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from those projected or assumed in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risk factors discussed under Item 1A. All forward-looking statements and risk factors included in this document are made as of the date of this report, based on information available to us as of such date. We assume no obligation to update any forward-looking statement or risk factor.
Overview We are a provider of cash access products and related services to the gaming industry in the United States and several international markets. Our products and services provide gaming establishment patrons access to cash through a variety of methods, including Automated Teller Machine ("ATM") cash withdrawals, credit card cash access transactions, point-of-sale ("POS") debit cash access transactions, check cashing and money transfers. In addition, we also provide products and services that improve credit decision-making, automate cashier operations and enhance patron marketing activities for gaming establishments. We began our operations as a joint venture limited liability company among M&C International, entities affiliated with Bank of America N.A. ("Bank of America") and First Data Corporation ("First Data") in July 1998. In September 2000, Bank of America sold its entire ownership interest in us to M&C International and First Data. In March 2004, Global Cash Access, Inc. ("GCA") issued $235 million in aggregate principal amount of 8 3/4% senior subordinated notes due 2012 and borrowed $260 million under senior secured credit facilities. Global Cash Access Holdings, Inc ("Holdings") was formed to hold all of the outstanding ownership interests of GCA and has guaranteed the obligations under the senior secured credit facilities. A substantial portion of the proceeds of these senior subordinated notes and senior secured credit facilities were used to redeem all of First Data's ownership interest in us and a portion of M&C International's ownership interest in us through a recapitalization (the "Recapitalization"), in which Bank of America reacquired an ownership interest in us. In May 2004, we completed a private equity restructuring (the "Private Equity Restructuring") in which M&C International sold a portion of its ownership interest in us to a number of private equity investors, including entities affiliated with Summit Partners, and we converted from a limited liability company to a Delaware corporation.
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In September 2005, we completed an initial public offering of common stock. In connection with that offering, our various equity securities that were outstanding prior to the offering were converted into common stock. In addition, Holdings became a guarantor, on a subordinated basis, of GCA's senior subordinated notes. In 2007, M&C International distributed its holdings of our common stock to its two principals, Karim Maskatiya and Robert Cucinotta. In May 2008, both Mr. Maskatiya and Mr. Cucinotta resigned from the Company's Board of Directors. As of December 31, 2008, Mr. Maskatiya and Mr. Cucinotta owned 11.8% and 11.8%, respectively of the Company's outstanding equity interests of the Company.
In June 2009, the Company repurchased 5,785,602 shares from Robert Cucinotta, which is believed to be all of the shares previously held by Mr. Cucinotta. In June 2009, Karim Maskatiya disposed of a number of shares in open market transactions, which is believed to be all of the shares previously held by Mr. Maskatiya.
We announced on February 28, 2008 that we intended to exit the Arriva Card, Inc. ("Arriva") business. The assets associated with the Company's Arriva operations have been reported as held for sale in the accompanying consolidated balance sheet as of December 31, 2008, and the results of operations for the Arriva line of business have been classified to discontinued operations for the six months ended June 30, 2009 and the years ended December 31, 2008 and 2007. The Company determined that as of July 1, 2009, the results of operations for the Arriva line of business were no longer material and the results of operations for the six months ended December 31, 2009 have been classified in continuing operations.
In April 2008, we completed the acquisition of Certegy Gaming Services ("CGS"), an enterprise providing cash access and check products and services to the gaming industry similar to GCA. The results of operations of CGS have been reflected in the applicable business segment financial information following this acquisition. In August 2008, we completed the acquisition of Cash Systems, Inc ("CSI"), a provider of cash access and related services to the retail and gaming industries similar to GCA. The results of operations of CSI have been reflected in the applicable business segment financial information following this acquisition.
Other than insubstantial assets that are immaterial in amount and nature, the sole asset of Holdings is the capital stock of GCA. The consolidated financial data set forth and discussed below reflects our financial condition as if GCA had been a wholly-owned subsidiary of Holdings during each of the periods and at the dates presented.
Trends
Our strategic planning and forecasting processes include the consideration of economic and industry-wide trends that may impact our business. The more material trends affecting our business are the following:
� The gaming sector in the United States continues to experience declines in gaming revenue as compared to the equivalent prior period,
� Patrons of gaming properties continue to migrate from credit card based transactions to debit transactions as a result of diminished credit access, consumer deleveraging or other consumer initiatives intended to manage spending patterns,
� There continues to be a migration from the use of traditional paper checks and cash to electronic payments, and
� There has been an increase in regulatory and legislative activity regarding notice requirements associated with incidents involving the misappropriation of consumer data, causing participants in the financial service and other industries to devote additional efforts to maintaining the security of their data files.
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Principal Sources of Revenues and Expenses Our principal sources of revenues include:
Cash advance revenues are comprised of transaction fees assessed to gaming patrons in connection with credit card cash access and POS debit card transactions at the time the transactions are authorized. Such fees are based on a combination of a fixed amount plus a percentage of the face amount of the credit card cash access or POS debit card transaction amount. ATM revenues are comprised of transaction fees in the form of cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals at the time the transactions are authorized and reverse interchange fees paid to us by the patrons' issuing banks. Cardholder surcharges are recognized as revenue when a transaction is initiated and reverse interchange is recognized as revenue on a monthly basis based on the total transactions occurring during the month. The cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals are currently a fixed dollar amount and not a percentage of the transaction amount.
Check services revenues are principally comprised of check warranty revenues and are generally based upon a percentage of the face amount of checks warranted. These fees are paid to us by gaming establishments. In some cases, gaming establishments pass on the fees to patrons. From 2002 to 2004, the face amount of checks warranted declined. In the fourth quarter of 2004, we introduced our Central Credit Check Warranty product, and its successful adoption in the marketplace has contributed to an increase in the face amount of checks warranted.
Other revenues consist primarily of Central Credit, LLC ("Central Credit") revenues that are based upon either a flat monthly unlimited usage fee or a variable fee structure driven by the volume of patron credit histories generated. Also included in Other revenues are revenues generated from Casino Marketing Services and revenues generated from Global Recovery Service revenues ("GRS"). This revenue results from a fee collected from GCA clients for research and investigation, using GCA's proprietary database to identify funds associated with individual credit card cash access and POS debit card transaction money transfers that were issued upon the completion of such a transaction for which a charge or debit was made to a cardholder's account but the bank draft was not successfully deposited by GCA's client.
Our principal costs and expenses include:
Cost of revenues are costs and expenses directly related to the generation of revenue and exclude depreciation and amortization. For credit card cash access and POS debit card transactions, ATM transactions and, to a much lesser extent, check services, we pay a commission to the gaming establishment at which the transaction occurs. Commissions are the largest component of cost of revenues (exclusive of depreciation and amortization). We expect commissions to increase as a percentage of revenue as new contracts are signed or existing contracts are renewed. We pay credit card associations and POS debit networks interchange fees for services they provide in routing transactions through their networks. In addition, we pay fees to participate in various ATM networks. The amounts of these interchange fees are determined by the card associations and networks in their sole discretion, and are subject to increase in their discretion from time to time. Many of our cash access contracts enable us to pass through to our gaming establishment customers, who may in turn pass through to patrons, the amount of any increase in interchange or processing fees. In the past, the major card associations have increased interchange rates at least annually, and they may do so in the future. We pay connectivity and processing fees to our network services providers. We incur warranty expense when checks that we have warranted through our Central Credit Check Warranty service or that TeleCheck Recovery Services, Inc. ("TeleCheck") has warranted through its check warranty service are dishonored upon presentment for payment. Our contract with TeleCheck limits our warranty expense for checks warranted by TeleCheck to a maximum percentage of the total face amount of dishonored checks. We have no limits on warranty expense for our Central Credit Check Warranty service. Other cost of revenues (exclusive of depreciation and amortization) consists primarily of costs related to delivering our Central Credit service and our patron marketing activities. Operating expenses consist primarily of salaries and benefits, armored carrier expenses, bank fees, legal expenses, telecommunications expenses and the cost of repair and maintenance on our cash access devices.
We generate interest income on the amount of cash in our bank accounts and on cash that is deposited into accounts to settle our credit card cash access and POS debit card transactions.
Interest expense includes interest incurred on our senior secured credit facilities and our senior subordinated notes, and the amortization of deferred financing costs. Interest expense also includes the cash usage fees associated with the cash used in our ATMs.
Our earnings are subject to taxation under the tax laws of the jurisdictions in which we operate. Prior to our conversion to a Delaware corporation, our domestic earnings were not subject to taxation because we were organized as a Delaware limited liability company, which is a flow-through entity for tax purposes. Subsequent to our conversion to a Delaware corporation, our domestic earnings have been subject to corporate taxation.
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Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 The following table sets forth the condensed consolidated results of operations and percentages of total revenue for the years ended December 31, 2009 and December 31, 2008 (amounts in thousands):
December 31, 2009 December 31, 2008 |
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Total Revenues
Total revenues for the year ended December 31, 2009 were $667.7 million as compared to $671.6 million for the prior year, a decrease of $3.9 million, or 0.6%, as compared to the year ended December 31, 2008. The primary driver of the decreased revenue in 2009 was a same-store revenue decline of 11.5%. Revenue generated from a gaming establishment we serve is included in same-store revenues if it contributed cash advance or ATM revenue during both the current and prior year reference periods. Same-store revenue does not include reverse interchange revenue generated in connection with ATM transactions, check services revenue or other revenue. This decline was somewhat offset by the inclusion of the operating results of CGS and CSI for the first three and seven months of 2009, respectively as compared to the same periods of 2008. CGS was acquired on April 1, 2008 and CSI on August 1, 2008. Segment changes in revenue are further discussed below:
Cash advance revenue for the year ended December 31, 2009 was $289.3 million, a decrease of $37.2 million, or 11.4%, as compared to the year ended December 31, 2008. This decrease was primarily due to lower credit usage by patrons at gaming establishments. This had a negative impact on our financial results as revenue generated from a credit card cash access transaction is generally more profitable than revenue generated from an ATM transaction. The number of credit card cash access transactions declined by approximately $0.5 million or 4.1% in 2009, and revenue per transaction also decreased on a year-over-year basis. This decrease was partially offset by the inclusion of three and seven months of operations, in 2009 but not in 2008 of the operations of CGS and CSI, as a result of the 2008 acquisitions of CGS and CSI.
ATM revenue for the year ended December 31, 2009 was $326.0 million, an increase of $36.8 million, or 12.7%, as compared to the year ended December 31, 2008. The increase was primarily attributable to gaming patrons performing a higher percentage of ATM transactions as compared to credit card cash access transactions. Although the number of ATM transactions decreased by $1.3 million or 1.5%, the ATM revenue per transaction increased due to a higher average surcharge assessed per ATM transaction. This increase in ATM revenue for 2009 was compounded by the inclusion of three and seven months of operations, in 2009 but not in 2008 of the operations of CGS and CSI, as a result of the 2008 acquisitions of CGS on April 1, 2008 and CSI on August 1, 2008, respectively. Check services revenue for the year ended December 31, 2009 was $38.5 million, a decrease of $3.8 million, or 9.1%, as compared to the year ended December 31, 2008. This decrease was primarily attributable to the decrease in the number of check services transactions by $0.2 million or 3.1% largely driven by the loss of customers in this segment. This decrease was partially offset by the inclusion of three and seven months of operations, in 2009 but not in 2008 of the operations of CGS and CSI, as a result of the 2008 acquisitions of CGS and CSI. Check services revenue is also generally impacted by a long-term trend whereby consumers are moving from physical checks to electronic forms of transactions. As a result of this trend and the roll-off of customers lost in 2009, we expect check services revenue to be lower in 2010 than it was in 2009. Other revenues for the year ended December 31, 2009, were $13.9 million, an increase of $0.3 million, or 2.1%, as compared to the year ended December 31, 2008. This increase was primarily due to additional revenue from GRS. We do not expect GRS to contribute material revenue to 2010 and beyond.
We provide our cash access products and related services almost exclusively to gaming establishments for the purpose of enabling gaming patrons to access cash. As a result, our business depends on consumer demand for gaming. Gaming is a discretionary leisure activity and participation in discretionary leisure activities has in the past and may in the future decline during economic downturns as fewer patrons frequent gaming establishments due to a lack of confidence related to general economic conditions. With fewer patrons visiting gaming establishments there may be less gaming activity which could result in a decrease in use of our cash access products and related services during fiscal year 2010.
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Costs and Expenses
Cost of revenues (exclusive of depreciation and amortization) for the year ended December 31, 2009, was $501.8 million, an increase of $8.8 million, or 1.8%, as compared to the year ended December 31, 2008. The increase was due primarily to increased commission-related expenses, which are the single largest cost element of cost of revenues. The increase in commissions in 2009 was due primarily to:
� the additional commission expenses resulting from the CGS and CSI acquisitions included in the first three and seven months of 2009 but not included in the first three and seven months of 2008, respectively, and
� the migration of transactions from credit card cash access transactions to ATM transactions, which have a higher proportion of commission expense to revenue than do credit card cash access transactions.
Operating expenses (exclusive of depreciation) and amortization for the year ended December 31, 2009 were $76.0 million, a decrease of $8.0 million, or 9.5%, as compared to the year ended December 31, 2008. The decrease in operating expenses is driven primarily to the elimination of expenses that were assumed as part of the acquisitions of CGS and CSI. In 2009, we continued to incur high external legal expenses driven by various litigation matters. External legal expenses were approximately $5.1 million in 2009 as compared to $4.2 million in 2008.
During the fourth quarter of 2009, we received a final settlement check for the VISA Check/Master Money Antitrust Litigation for $2.8 million, and in 2008, $0.4 million was received related to the same matter. Monies received for the VISA Check/Master Money Antitrust Litigation in 2009 and 2008 have been recognized as a reduction to operating expenses.
Depreciation and amortization expense for the year ended December 31, 2009 was $17.9 million, an increase of $1.8 million, or 11.4%, as compared to the year ended December 31, 2008. This increase is due primarily to the increase in depreciable assets and amortizing intangibles resulting from the acquisitions of CGS and CSI.
Primarily as a result of the factors described above, operating income for the year ended December 31, 2009 was $72.0 million, a decrease of $6.6 million or 8.4% as compared to the year ended December 31, 2008.
Interest expense, net, was $18.0 million in 2009, a decrease of $9.9 million, or 35.6%, as compared to 2008. The decrease resulted from significantly lower interest rates compared to the prior period, lower average outstanding borrowings partially offset by a higher average draw on the Bank of America Treasury Services Agreement ('Treasury Services Agreement"). The average balance drawn on this agreement in 2009 was $358.7 million as compared to $319.2 million for the year ended December 31, 2008. The lower interest rates resulted in substantially lower cash usage fees of $2.1 million in 2009. Interest income was also lower due to lower interest rates earned on invested cash balances during 2009 as compared to 2008.
Income tax expense was $20.6 million, a decrease of $2.8 million or 12% for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The provision for income tax reflected an effective income tax rate of 38% for 2009 as compared to 46% for 2008. The decrease in our effective income tax rate is primarily due to a decrease in the expense related to the expiration on non-qualified stock options and their related impact on income tax. Such expenses are not deductible for income tax purposes and therefore, their occurrence results in a relatively higher effective income tax rate. Primarily as a result of the foregoing, net income was $33.6 million for the year ended December 31, 2009, an increase of $10.1 million or 42.8%, as compared to the prior year.
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Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 The following table sets forth the condensed consolidated results of operations and percentages of total revenue for the years ended December 31, 2008 and December 31, 2007 (amounts in thousands):
December 31, 2008 December 31, 2007 |
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